What is the AAPR of a home loan?

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The AAPR of a home loan is a way of calculating its ‘true’ cost – here are some important things to know about what the term means, how it’s calculated and how it works.

The property market is loaded with acronyms like LVR (loan to value ratio), P&I (principal and interest) and DTI (debt to income ratio), and while AAPR might seem like just another one of these, it’s actually more important to understand than you might think.

What does AAPR mean in a home loan?

AAPR is an acronym for ‘average annual percentage rate’, and it is a method of calculating the full actual cost of a home loan, taking into consideration additional fees and ongoing charges you’ll pay over the course of a home loan, in addition to the interest rate.

In a similar way to the comparison rate of a home loan, the AARP represents the full ‘true’ cost of what you will be paying for over the period of a home loan term. For this reason, it can be useful, when comparing home loans, to consider AAPR.

Say, for example, that you see a home loan advertised with a low interest rate. You may believe it to be the cheapest option, but when you consider the AARP, which includes the attached fees and charges, it may not actually be the cheapest option available.

Looking at the AARP of a loan can provide an easy way to compare different home loan costs and weigh them up against your personal needs, budget and long-term financial goals.

What does AAPR include?

The AAPR of a home loan can include fees and charges such as:

monthly account fee
establishment fee
mortgage documentation fee
settlement fee
annual fee
interest rate
introductory offers
honeymoon rates.

How is AAPR calculated?

The AAPR takes your actual home loan amount and calculates the rate over a seven year period, taking into consideration the extra fees and charges.

Is there a difference between AAPR and a comparison rate?

Similar to the AAPR, a comparison rate calculates the average rate with the addition of any other upfront or ongoing fees during the home loan term; however, there are differences in how the two are calculated.

Home loan comparison rates are calculated based on a $150,000 loan, over a 25-year loan term. Since a vast majority of home loans used today exceed $150,000, comparison rates are used as more of a guide for determining the cost of your home loan in the long run.

Lenders in Australia are legally required to show customers a comparison rate alongside a product’s interest rate, which just reflects how much interest you will be charged per year on the balance of your home loan.

Although they both attempt to do the same thing – which is to determine the most accurate and real rate of your home loan – you may feel that the AAPR is a more accurate reflection of an overall home loan rate over its term.

This is because the AAPR includes more costs than a comparison rate, such as introductory costs and honeymoon costs.

It is worth keeping in mind that the AAPR does not include government fees and fees that are incurred in specific circumstances, such as redraw fees.